The Consumer Financial Protection Bureau (CFPB) this week released a guide to help older consumers navigate their pension payout options and make the right decisions about their retirement income.
The guide gives near-retirees the information they need to understand the trade-offs of taking their pension in a monthly payment or in a lump sum. To help consumers who are considering a lump-sum payout option from a private-sector defined benefit pension plan, the CFPB guide also provides tips and warnings about how to protect and best manage that money.
According to a government report, many retiring consumers are not provided information by their employers about the long-term financial impact of choosing between a lump sum or an annuity pension payout or where to find help. The CFPB's consumer guide highlights the benefits and risks of taking a pension as a lump sum instead of lifetime monthly payments.
The monthly payment option offers steady lifetime income, which substantially reduces a consumer's risk of running out of money later in life. This is especially important if the consumer or their spouse is in good health or if either of the two has a family history of longevity. A lump-sum payout, however, might make sense if the consumer is terminally ill or in critically poor health, or the consumer already has sufficient income to cover basic living expenses.
When a consumer chooses a lump-sum pension payout instead of monthly payments, the responsibility for managing the money shifts from the employer to the employee. For a monthly payment option, consumers don't need to worry about their investment skills, or how their financial management skills may change as they age. In contrast, a lump-sum payout can give a consumer the flexibility of choosing to pay off large debts, where to invest or save the money, and when and how much to withdraw.
Another factor to consider is that a consumer's pension is typically insured by the Pension Benefit Guaranty Corporation (PBGC). In the event the consumer's company declares bankruptcy or cannot make its pension payments, the PBGC guarantees those payments up to a certain amount. Pension payments are also protected against certain creditor claims or debt collectors. With a lump-sum payout, consumers lose these protections.
The guide also provides tips for retirees who choose to take the lump-sum payout, including checking for errors, planning for tax consequences, considering future family needs, and how to avoid scams.
More information for older Americans about making financial decisions, protecting assets, preventing financial exploitation, and planning for long-term financial security can be found at:consumerfinance.gov/older-americans/.
The guide for navigating pension payouts can be found here.